The
behaviour of interest-based economic system
also causes hindrance in the way of
productivity

By
MUHAMMAD ZEESHAN FARRUKHOct 17 - 23,
2005

Islam has
prohibited interest in a very strong way. It has
declared interest "Haram" in the Holy Quran.
Now a days there is a visible development of Islamic
Financial System, not only in Muslim countries but in
the Western world also. It is considerable that the
non-Muslims are also looking towards the Islamic
interest-free system for solving economic problems that
are confronting the economists. So, the Islamic
financing is also flourishing in the Western world.

Being Muslim,
we should obey the orders of the Quran that have been
revealed by Almighty Allah. Being Muslim, we have faith
that every injunction in the Quran has been revealed for
the welfare and prosperity of mankind, not only for this
world but for the eternal world also. So, we should obey
the order of Allah about interest also and strive to
implement Islamic financial system without determining
whether the interest-free system would be successful or
not or what are the shortfalls of interest-based system
because it is the order of Allah but when we introduce
Islamic economic system before non-Muslims, we must
clarify the disadvantages of interest-based system and
advantages of Islamic economic system. Unfortunately, we
must also clarify the scenario in front of those
so-called Muslims who consider the Islamic financial
system unworkable in the modern world. We should pray
for these Muslims.

I have
mentioned clearly the shortfalls of interest in this
article in comparison with Islamic financial system to
clarify why Allah Almighty has forbidden interest.

In
interest-based system, the rich becomes richer and poor
becomes poorer because there is a concentration of
wealth in this system. How? In interest-based banking
system, an individual may take loans for consumer needs
and agrees to repay the principal amount with the agreed
amount of interest. From economic point of view, it is
illogical that one person who is fulfilling his needs by
taking credit and there is not even work of productivity
in this regard, how can he repay the principal amount
with interest. He is so compelled that he must agree to
give interest against the immediate need because there
is no other source to fulfill. So, the interest-based
banking system takes undue advantage against the needs
of these people and it leads to exploitation of poor
people. On the other hand, in the Islamic economic
system, the interest-free loan can be given to these
people in the form of QARZ-E-HASANA. The Islamic banks
may reserve some portion of their capital in this regard
and may charge only documentation fee and other charges
form these customers. So, in this system, there is no
exploitation of poor people but in case of delay of
payment by the debtor and if there is a genuine reason
in this regard, Islam encourages the creditor to give
more time to debtor for eternal success. But it does not
mean that the debtor would take undue advantage of it.

When we look at
the business in the modern society, even large companies
have to take debts and other liabilities to meet the
deficiency of capital. The banks give loans to these
companies and charge the interest over it. Here, the
creditor has no concern with the profit and loss of the
company. Here the question arises: When a company does
the business, there is not always a possibility of
profit but the business may face a loss also so in this
way, when a company takes debts from the conventional
financial institutions and unfortunately, the company
would go into the loss, it has to repay the principal
amount with interest and it may lead to bankruptcies. If
the company is a listed one, its share prices would go
down and it may be delisted so this condition would not
go in the favor of the overall economy. We may see many
examples in this regard.

On the other
hand, in the Islamic economic system, MUDARABAH and
MUSHRAKAH are the best ways in this regard. These are
the ideal instruments for financing in Islamic Shariah
mode. By these Islamic instruments of financing, the
bank and the company go into partnership. Here, the rate
of profit distribution is decided by the mutual consent.
In case of loss, the loss in borne by both the parties
according to the rate of contribution. So, in this case,
no one can take undue advantage of financing and each
party is in risky condition. Islam prohibits that one
party would take advantage either in case of profit or
loss.

Now, we come to
the international level where the rich nations and
international donor agencies have been exploiting the
poor nations in the same way as conventional banks.
Here, the creditors give huge loans with huge rate of
interest. The World Bank and International Monetary Fund
(IMF) give loans to help meet the budget deficit and for
developmental purposes like reforms in education,
health, nutrition etc. Here, you must recall the
condition of poor individual as poor nation. In this
way, poor nations have been caught in the powerful hands
of these institutions and there is more poverty and
budget deficits in these countries rather than
prosperity as evident from the world's condition. Here,
these institutions have only concern with their money
with pre-determined interest. They have no concern with
the prosperity and poverty reduction of these countries
so after giving credit, these institutions get a permit
to interfere in the country's internal affairs and
economy and guides the government according to own
choices. The people of every country understands their
own country's political, legal, economic and social
environment very well that cannot be understood by the
outsider. So, it results in the destruction of the
economy of poor nations. In this scenario, the country
would think about the repayment of loan rather than
thinking of development and the government has to take
those steps which would not be in the favour of society
and people like imposition of high taxes and inflation
etc.

I have drawn a
picture of a needy individual to government level and
you see how interest-based system has been exploiting
the economy of this world. Does this system lead to
prosperity of this world? Tell to yourself and get
answer.

The
interest-based system leads to enhancement in
selfishness, hatred and greed as evident from the
present world's condition. The love and affection is
lacking in the present so-called modern world. The
respect of humanity is decreasing day by day. In the
western society, family system has been destroyed and it
is also affecting our culture. Everybody is greedy for
more and more wealth because the modern capitalist
system has started the race of earning money by any
means. Wars and hatred in the world are the results of,
of course, this system. That's why Islam has prohibited
this curse. According to Allama Yusuf Ali (eminent
translator of the Holy Quran into English),
"Whereas legitimate trade or industry increases the
prosperity and stability of men and nations, dependence
over usury (excessive interest) would merely encourage a
race of idlers, cruel bloodsuckers and worthless fellows
who do not know their own good and therefore akin to
madman."

Here, one may
argue that if interest-based economic system is not
favorable for the mankind, why the western world has
attained marvelous development, specially USA?

The answer is
that the interest-based economic system is not the cause
of successes and prosperity of the western world and
USA. It is a great misunderstanding among our people due
to lack of knowledge of international economy. These
countries have very much developed in science and
technology so these countries are earning very much
through their inventions and innovations. Another pity
factor is that the corrupt politicians of the poor and
developing countries have deposited the looted money in
the banks of the western world. These are the general
factors that everybody can understand but the
considerable fact is that a major part of funds which
finance business needs in the US, are raised as equity
(common stocks) and not through loans. Kester (1986)
lists debt-to-equity ratio for major categories of
business in the US and Japan, and shows that equity
financing is much more prevalent than debt financing.
This situation shows the resistance of people specially
business community against this system. It is evident
that the developed world likes equity participating
financing that Islam wants in a true manner according to
Islamic laws in which there would be no exploitation.

It is also
considerable that every American citizen has a debt of
24000 US dollars and the total debt upon the American
economy is 7.7 trillion US dollars. This is the
condition of that country that is called as super power.
This situation may cause a great disaster in the
American economy in the future.

The
interest-based economic system also creates unemployment
because the conventional financial institutions give
loans to those sectors that have already strong in
society so the concentration of wealth is in few rich
hands. They do not give loans to those persons who may
be capable to run business successfully or if may give
loans, they charge high interest. This condition leads
to exploitation. One person who is going to settle the
business, how he can repay the huge amount of interest?
Butt there is no consideration of this important point
in this system. But on the other hand, in the Islamic
economic system, the instrument of diminishing Musharkah
may be used for this purpose in which both the parties
invest. One party e.g. Islamic bank invests 80% and
other party invests 20%. With the passage of time, the
other party may purchase the share of bank so the bank's
share would be diminishing and at last, the other party
would be an owner of the business. The instruments of
Mudarabah and Musharakah may also be used.

The behaviour
of interest-based economic system also hinders in the
way of productivity because creditor and investor
invests only in powerful sectors and the other sectors
are not explored too much in this system. According to
conventional point of view of economics, human wants are
unlimited but resources are limited. On the other hand,
Islamic point of view is that resources are unlimited so
that the man must explore the resources.

In the end, I
would like to tell you about the concept of capitalism
in the present world. Capitalism says that every person
is free to do any work without any religious and
cultural hindrances - the main objective is profit
maximization and capital is regarded as factor of
production.

Of course, this
concept is the opposite of Islamic economic concept in
which the Muslims have to live according to the
teachings of Islam and every Haram work should be
avoided like interest. Islam permits us to earn profit
but not at the cost of welfare of mankind but there
should be a consideration of welfare of mankind. Capital
or money is not considered as factor of production which
means that money cannot earn money directly as in the
interest-based economic philosophy that money can earn
money (interest). Money is only a medium of exchange in
this world according to Islamic economic philosophy.